Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades

  • Author(s): LUKAS MENKHOFF, LUCIO SARNO, MAIK SCHMELING, ANDREAS SCHRIMPF
  • Published: Mar 18, 2016
  • Pages: 601-634
  • DOI: 10.1111/jofi.12378

ABSTRACT

We study the information in order flows in the world's largest over‐the‐counter market, the foreign exchange (FX) market. The analysis draws on a data set covering a broad cross‐section of currencies and different customer segments of FX end‐users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.

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